SCUDDER
INVESTMENRS(SM)
[LOGO]
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Scudder Income Fund
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BOND
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Scudder Income Fund
Fund #063
Annual Report
January 31, 2000
For investors seeking a high level of income consistent with the prudent
investment of capital.
A no-load fund with no commissions to buy, sell, or exchange shares.
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Contents
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4 Letter from the Fund's President
6 Performance Update
8 Portfolio Summary
9 Portfolio Management Discussion
14 Glossary of Investment Terms
15 Investment Portfolio
20 Financial Statements
23 Financial Highlights
24 Notes to Financial Statements
28 Report of Independent Accountants
29 Tax Information
30 Officers and Trustees
31 Investment Products and Services
33 Scudder Solutions
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Scudder Income Fund
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ticker symbol SCSBX fund number 063
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Date of o In a period when bond prices were rattled by stronger global
Inception: growth and three interest rate increases in the United
4/24/28 States, the fund's diversified approach provided a cushion
against excessive volatility.
Total Net o Management maintained a heavy weighting in corporates, with
Assets as a particular emphasis on bonds issued by companies with
of 1/31/00: strong, stable cash flows.
$688 million
o The fund finished in the top 25% of domestic taxable bond
funds for the year ended January 31, according to Lipper
Analytical Services.^1
^1 Source: Lipper Analytical Services, Inc., is an independent analyst of
investment performance. Performance includes reinvestment of dividends and
capital gains. For the period ended January 31, 2000 Scudder Income Fund's
Lipper ranking was 41 out of 167 funds for the one-year period, 88 out of 135
funds for the three-year period, 48 out of 100 for the five-year period, and 17
out of 42 for the ten-year period.
3
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Letter from the Fund's President
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Dear Shareholders,
The U.S. economy continued to exceed investors' growth expectations over the
past twelve months, capping the longest economic expansion in the nation's
history. While this remarkable environment was accompanied by equally impressive
performance from the domestic equity markets, it has not been favorable for
bonds. Strong economic growth and tight labor markets have sparked fears of
accelerating inflation. In an effort to fend off potentially excessive growth
that could harm the U.S. economy in the long run, the Federal Reserve publicly
cautioned investors and increased key short-term interest rates three times in
the second half of 1999. By January, the continued strength of the domestic
economy had raised fears that the Fed would be forced to raise rates several
more times in 2000.
We never like to see price declines, but as professional investment managers we
know that the bond market's ups and downs are an inevitable fact of investing.
With the cyclicality of the fixed income markets as a given, we believe that the
job of your fund's management team is to seek high current income and the best
total returns (price changes plus dividend income) in all market environments.
This means exceeding the performance of our peers in rising markets and
declining less in falling markets. We believe that the fact that the fund has
outperformed its peer group average not only over the most recent reporting
period, but over the long-term as well, is indicative of the fund's success in
4
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achieving this goal. For more information on the fund's strategy and
management's outlook for the bond market, please turn to the Portfolio
Management Discussion that begins on page 8.
For current information on the fund and your account, visit our Internet Web
site at www.scudder.com. There you'll find a wealth of information, including
the fund's most recent performance, the latest news on Scudder products and
services, and the opportunity to perform account transactions. You can also
speak with one of our representatives by calling 1-800-SCUDDER (1-800-728-3337).
Thank you for your continued investment in Scudder Income Fund.
Sincerely,
/s/Lynn S. Birdsong
Lynn S. Birdsong
President,
Scudder Income Fund
5
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Performance Update
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January 31, 2000
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Growth of a $10,000 Investment
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THE ORIGINAL DOCUMENT CONTAINS A LINE CHART HERE
Scudder Income Fund LB Aggregate Bond Index*
90 10000 10000
91 11140 11161
92 12658 12615
93 14033 13999
94 15840 15278
95 15053 14925
96 17690 17453
97 18215 18021
98 19938 19956
99 21143 21565
00 20591 21163
Yearly periods ended January 31
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Fund Index Comparison
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Total Return
Growth of Average
Period ended 1/31/2000 $10,000 Cumulative Annual
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Scudder Income Fund
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1 year $ 9,739 -2.61% -2.61%
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5 year $ 13,678 36.78% 6.46%
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10 year $ 20,591 105.91% 7.49%
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LB Aggregate Bond Index*
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1 year $ 9,814 -1.86% -1.86%
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5 year $ 14,180 41.80% 7.23%
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10 year $ 21,163 111.63% 7.78%
* The unmanaged Lehman Brothers (LB) Aggregate Bond Index is a market
value-weighted measure of treasury issues, agency issues, corporate bond
issues and mortgage securities. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or expenses.
6
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Returns and Per Share Information
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Yearly periods ended January 31
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
Scudder Income Fund LB Aggregate Bond Index*
1991 11.40 11.61
1992 13.62 13.02
1993 10.87 10.98
1994 12.87 9.14
1995 -4.96 -2.32
1996 17.52 16.94
1997 2.97 3.25
1998 9.46 10.73
1999** 6.04 8.06
2000** -2.61 -1.86
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998 1999** 2000**
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Total
Return (%) 11.40 13.62 10.87 12.87 -4.96 17.52 2.97 9.46 6.04 -2.61
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Index Total
Return (%) 11.62 13.02 10.97 9.14 -2.32 16.94 3.26 10.73 8.06 -1.86
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Net Asset
Value ($) 12.98 13.64 13.73 14.00 12.51 13.70 13.18 13.59 13.36 12.21
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Income
Dividends ($) 1.03 0.92 0.93 0.87 0.76 0.86 0.81 0.79 0.79 0.81
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Capital Gains
Distributions($) 0.06 0.14 0.40 0.57 0.02 0.09 0.09 0.01 0.24 --
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</TABLE>
* The unmanaged Lehman Brothers (LB) Aggregate Bond Index is a market
value-weighted measure of treasury issues, agency issues, corporate bond
issues and mortgage securities. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased.
** If the Adviser had not maintained the Fund's expenses, total returns would
have been lower.
7
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Portfolio Summary
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January 31, 2000
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Diversification
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Corporate Bonds 61%
U.S. Treasury Obligations 19%
U.S. Government Agency
Pass-Thrus 14%
Asset Backed Securities 4%
Other 2%
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100%
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The fund remains heavily weighted in corporate bonds, which management believe
to be attractively valued in relation to other sectors of the market.
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Quality
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
U.S. Government and
Agencies 31%
AAA* 8%
AA 2%
A 24%
BBB 16%
BB 13%
B 5%
NR 1%
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100%
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* Category includes cash equivalents
The fund's average credit quality stood at A1 at the end of the period.
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Effective Maturity
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A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
Less than 1 year 1%
1 or less than 5 years 28%
5 or less than 8 years 28%
8 or less than 10 years 26%
Greater than 10 years 17%
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100%
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Weighted average effective maturity: 8.25 years
Management decreased the fund's weighting in bonds with maturities of eight
years or more.
For more complete details about the Fund's investment portfolio, see page 14. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
8
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Portfolio Management Discussion
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January 31, 2000
In the following interview, portfolio manager Robert S. Cessine discusses
Scudder Income Fund's strategy and the market environment in the twelve-month
period ended January 31, 2000.
Q: The bond market experienced extremely poor performance over the past year.
How did this play out in the various subsectors you follow, and what were some
of the causes?
A: The fact that growth in both the United States and the overseas economies has
come in well above expectations has put pressure on bond prices since early last
year. Yields on long-term Treasuries began 1999 at slightly above 5%, reflecting
the widely held expectation that growth would remain tame and that deflation,
not inflation, would be the market's primary concern. As the year progressed,
however, it became apparent that the global economy would in fact be much
stronger than expected. Asia staged a sharp recovery, thereby removing one of
the key factors that was supporting bond prices in 1998. Commodity prices have
also staged a rebound, led by the surge in oil prices to nine-year highs in
January 2000. On the domestic front, continued gains in the stock market helped
fuel a 9% rise in holiday sales, and gross domestic product posted a strong 5.8%
gain in the fourth quarter. Most important, the extreme tightness in the labor
markets sparked concerns that a sharp increase in wage growth was inevitable.
While actual evidence of inflation on the consumer level remains spotty, the
consensus opinion among market participants is that the Fed will be forced to
raise interest rates on multiple occasions in 2000. These factors have combined
to create an extremely negative environment for bonds. The yield on the
benchmark 30-year Treasury issue, which stood at 5.09% on January 29, 1999, rose
to a peak of 6.75% by January 18, 2000. Five- and ten-year notes were hit
especially hard in the latter half of the period.
Other sectors of the bond market held up relatively well in relation to
Treasuries over the full year. Mortgage- and asset-backed securities both
outperformed, as did
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government agency notes (such as those issued by Fannie Mae). Corporate issues
performed poorly over the period, but outperformed Treasuries in the fourth
quarter of 1999 as fears of a supply-demand imbalance associated with Y2K
dissipated. The stronger performance of these sectors had a positive effect on
fund performance. Our emphasis on diversifying the portfolio among a variety of
corporates, asset-backeds, and agency notes helped mitigate the effects of a
difficult interest rate environment.
Q: How has the fund performed in this environment?
A: For the twelve-month period ended January 31, 2000, the fund provided a
return of -2.61%, which trailed the -1.86% return of its unmanaged benchmark,
the Lehman Brothers Aggregate Bond Index. However, the fund's return placed it
in the top 25% of all domestic taxable bond funds, as calculated by Lipper
Analytical Services. The fund has also outperformed its peer group over the
five- and ten-year periods ended on the same date.
Q: The fund is heavily weighted in corporate bonds. How did you position the
portfolio within that sector?
A: In the last report, which covered the six months ended July 31, we stated
that we were raising our weighting in corporates. At that juncture, market
participants were concerned that the approach of Y2K would bring about a glut of
supply in the third quarter -- as corporations rushed to complete their
financing needs ahead of year-end -- as well as a reduction in demand as
investors shunned riskier assets in anticipation of possible disruptions
associated with Y2K. Believing that these fears were overblown, we added to the
portfolio's position in corporates in order to take advantage of their more
attractive yields, and the fund was therefore positioned to benefit when the
sector outperformed Treasuries over the latter part of the period. Even though
yield spreads (the difference between the yield on corporates and the Treasury
bond of equivalent maturity) have contracted, we believe that the sector remains
attractive relative to
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historical levels. We currently hold 61% of assets in corporate bonds, including
17% of assets in high yield issues. The fund is currently approaching the
maximum allocation it can hold in high yield bonds (20%), so this represents a
relatively aggressive positioning. We feel that the combination of attractive
valuations, continued strength in the domestic economy, and powerful corporate
earnings growth should work to the benefit of high yield issues in the coming
month.
Within the corporate sector, we continue to focus on bonds issued by companies
with strong, reliable cash flows. The financial press generally focuses on the
way a company's earnings report affects its stock price, but the strength and
quality of earnings is also an important driver of corporate bond prices. As a
result, we utilize intensive credit research in order to avoid companies whose
bonds can "blow up" due to disappointing earnings. The fund has also been
well-positioned to benefit from the rally in the media and telecom sectors. In
addition, our position in the energy sector was boosted by the sharp rise in oil
prices. Looking ahead, we are confident that the fund's diversified mix of
high-quality bonds in a variety of industries -- including utilities,
financials, retailers, and auto manufacturers -- will help the fund produce
steady performance over time.
Q: What was your strategy with respect to duration and credit quality?
A: When we last spoke six months ago, we mentioned that we were reducing the
fund's duration to a neutral level with respect to its benchmark. We
accomplished this by moving out of bonds with the longest maturities (20-30
years) and investing in intermediate-term bonds, which we believed were more
attractive given the flattening of the yield curve. Although intermediate-term
bonds suffered a sell-off in the latter part of January, this decision had a
positive effect on performance in the negative interest rate environment of the
last six months.
As of January 31, the average credit quality of the fund's holdings stood at A1,
which was down slightly from the
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end of July. We achieved this rating by employing a "barbell" approach, whereby
we balanced the fund's increased weighting in high-yield issues (which carry
ratings of BB or below) with an increased weighting in bonds A rated. The
impetus for this strategy has been our belief that high-quality investment grade
bonds and high-yield issues offer better value than bonds that lie in between
the two (such as those rated BBB).
Q: What is your outlook for the year ahead?
A: We believe that the bond market will remain unsettled well into 2000.
Economic reports should continue to have a significant impact on short-term
market movements as investors search for signs of incipient inflation. Until
there is a clearer indication that the Fed will be able to move away from its
current bias toward higher rates, we expect bond market performance to remain
volatile. As a result, we intend to maintain a neutral duration strategy until
the interest rate outlook stabilizes. In doing so, we intend to position the
portfolio to ride out the effects of further bond market volatility, while at
the same time providing the portfolio with the flexibility to increase the
fund's interest rate exposure once it becomes apparent that the Fed is finished
raising rates. Until that time, the fund's positioning should help mitigate the
effects of bond market volatility. We have increased the level of liquidity and
diversification in the portfolio, and are confident that the fund's mix of
corporate bonds, government issues, and mortgage-backed securities will provide
strong risk-adjusted returns going forward.
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Scudder Income Fund:
A Team Approach to Investing
Scudder Income Fund is managed by a team of Scudder Kemper Investments, Inc.
(the "Adviser") professionals, each of whom plays an important role in the
fund's management process. Team members work together to develop investment
strategies and select securities for the fund's portfolio. They are supported by
the Adviser's large staff of economists, research analysts, traders, and other
investment specialists who work in offices across the United States and abroad.
The Adviser believes that a team approach benefits fund investors by bringing
together many disciplines and leveraging the firm's extensive resources.
Lead portfolio manager Robert S. Cessine joined the Adviser in January 1993, and
is responsible for the fund's investment strategy, including duration
management, asset allocation, security selection, and trading.
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Glossary of Investment Terms
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Asset-backed Bonds or notes backed by loan paper or accounts receivable
Securities originated by banks, credit card companies, or other
providers of credit and often "enhanced" by a bank Letter
of Credit or by insurance coverage provided by an
institution other than the issuer.
Deflation A decline in the prices of goods and services. The
opposite of inflation, deflation usually has a negative
effect on output and employment.
Duration A measure of bond price volatility. Duration can be
defined as the approximate percentage change in price for
a 100 basis point (one single percentage point) change in
market interest rate levels. A duration of 5, for example,
means that the price of a bond should rise by
approximately 5% for one-percentage point drop in interest
rates, and fall by 5% for a one-percentage point rise in
interest rates.
Weighting Refers to the allocation of assets -- usually in terms of
(over/under) sectors, industries, or countries -- within a portfolio
relative to the portfolio's benchmark index or investment
universe.
Yield Curve A graph showing the term structure of interest rates
by plotting the yields of all bonds of the same quality
with maturities ranging from the shortest to the longest
available. The resulting curve shows the relationship
between short-, intermediate-, and long-term interest
rates.
Yield Spread The difference in yield between two types of bonds.
A mortgage-backed security's yield is often measured
against the yield of a Treasury bond of similar maturity
as a market yardstick. If yield spreads are "narrow," for
example, it typically means that yields have been
declining, and prices rising, compared with Treasury bonds
of similar maturity.
(Source: Scudder Kemper Investments, Inc.; Barron's Dictionary of Finance and
Investment Terms)
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<TABLE>
<CAPTION>
Investment Portfolio as of January 31, 2000
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Principal
Amount ($) Value ($)
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Repurchase Agreements 0.1%
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<S> <C> <C>
State Street Bank and Trust Company, 5.68%,
to be repurchased at $1,067,168 on 2/1/2000
(Cost $1,067,000)* ............................................. 1,067,000 1,067,000
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U.S. Treasury Obligations 18.5%
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U.S. Treasury Bond, 10.75%, 8/15/2005 ........................... 27,000,000 31,881,060
U.S. Treasury Bond, 9.375%, 2/15/2006 ........................... 15,000,000 16,931,250
U.S. Treasury Bond, 7.25%, 5/15/2016 ............................ 19,000,000 19,970,710
U.S. Treasury Inflationary Index Bond, 3.684%, 4/15/2028 ........ 15,750,000 14,688,198
U.S. Treasury Bond, 6.125%, 8/15/2029 ........................... 450,000 428,342
U.S. Treasury Note, 6.125%, 12/31/2001 .......................... 2,600,000 2,575,222
U.S. Treasury Note, 5.625%, 12/31/2002 .......................... 5,000,000 4,859,350
U.S. Treasury Note, 5.5%, 5/31/2003 ............................. 10,000,000 9,643,700
U.S. Treasury Note, 6.5%, 10/15/2006 ............................ 8,725,000 8,598,226
U.S. Treasury Inflationary Index Note, 3.927%, 1/15/2009 ........ 16,000,000 15,880,445
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Total U.S. Treasury Obligations (Cost $138,363,087) 125,456,503
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Government National Mortage Association 3.8%
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Government National Mortgage Association Pass-thru,
7% with various maturities to 5/15/2029 ........................ 19,587,713 18,632,812
Government National Mortgage Association Pass-thru,
7.5% with various maturities to 11/15/2027 ..................... 4,635,953 4,525,849
Government National Mortgage Association Pass-thru,
7% with various maturities to 3/15/2029 ........................ 2,897,104 2,754,965
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Total Government National Mortgage Association (Cost $27,516,462) 25,913,626
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Collateralized Mortagage Obligations 10.6%
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Federal National Mortgage Association, 6.5%, 3/1/2028 ........... 36,673,142 34,071,641
Federal National Mortgage Association, 7.25%, 1/15/2010 ......... 9,600,000 9,541,536
Federal National Mortgage Association, 8% with various
maturities to 2/1/2013 ......................................... 15,827,524 16,003,840
The accompanying notes are an integral part of the financial statements.
15
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Principal
Amount ($) Value ($)
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Residential Accredit Loans, Inc., Series 1997-A7,
7.25%,11/25/2027 ........................................ 13,025,473 12,343,671
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Total Collateralized Mortgage (Cost $76,090,079) 71,960,688
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Foreign Bonds -- U.S. Denominated 2.3%
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PacifiCorp Australia LLC, 6.15%, 1/15/2008 ............... 9,000,000 8,069,760
Petroleum Geo-Services, 6.625%, 3/30/2008 ................ 8,000,000 7,295,520
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Total Foreign Bonds-- U.S. Denominated (Cost $16,736,870) 15,365,280
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Asset Backed 4.3%
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Automobile Receivables 1.4%
First Security Auto Owner Trust, Series 1999-2 A3,
6%, 10/15/2003 .......................................... 7,000,000 6,902,656
Premier Auto Trust Asset Backed Certificate,
Series 1996-3 A4, 6.75%, 11/6/2000 ...................... 2,786,084 2,786,947
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9,689,603
Credit Card Receivables 1.4% -----------
MBNA Master Credit Card Trust, 5.8%, 12/15/2005 .......... 10,000,000 9,568,700
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Manufactured Housing Receivables 1.5%
Green Tree Financial Corp., 7.36%, 10/1/2020 ............. 5,000,000 3,831,250
Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D,
9.85%, 7/15/2011 ........................................ 6,528,692 6,646,992
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10,478,242
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Total Asset Backed (Cost $31,224,643) 29,736,545
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Corporate Bonds 58.3%
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Consumer Discretionary 0.7%
Tricon Global Restaurants, 7.65%, 5/15/2008 .............. 5,250,000 4,915,313
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Consumer Staples 6.8%
Bass America Inc., 6.625%, 3/1/2003 ...................... 9,500,000 9,224,690
Borden Inc., 7.875%, 2/15/2023 ........................... 5,000,000 3,839,750
Pepsi Bottling Holdings, Inc., 5.625%, 2/17/2009 ......... 10,000,000 8,680,000
Phillip Morris Companies, Inc., 7.2%, 2/1/2007 ........... 8,750,000 8,189,300
The accompanying notes are an integral part of the financial statements.
16
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Principal
Amount ($) Value ($)
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Racers-Kellogg, 5.75%, 2/2/2001 ....................... 10,000,000 9,937,500
Safeway Inc., 7.25%, 9/15/2004 ........................ 6,700,000 6,588,445
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46,459,685
Health 0.4% -----------
Tenet Healthcare Corp., 8.625%, 1/15/2007 ............. 3,000,000 2,872,500
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Communications 5.4%
AT&T Corp., 6%, 3/15/2009 ............................. 3,500,000 3,112,444
Metromedia Fiber Network, Inc., 10%, 12/15/2009 ....... 3,300,000 3,300,000
Qwest Communications International, 7.5%, 11/1/2008 ... 10,000,000 9,641,600
Sprint Capital Corp., 6.125%, 11/15/2008 .............. 6,800,000 6,075,664
Sprint Capital Corp., 6.375%, 5/1/2009 ................ 15,700,000 14,272,399
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36,402,107
Financial 16.0% -----------
Bank United Capital Trust, Series B, 10.25%, 12/31/2026 4,250,000 3,778,674
Boeing Capital Corp., 6.75%, 12/23/2003 ............... 10,000,000 9,787,700
Capital One Bank, 6.57%, 1/27/2003 .................... 5,000,000 4,823,500
CSBI Capital Trust I, 11.75%, 6/6/2027 ................ 6,200,000 6,634,000
First Union Institutional Capital II, 7.85%, 1/1/2027 . 14,000,000 12,913,600
Firststar Bank, 7.125%, 12/1/2009 ..................... 3,800,000 3,612,546
FleetBoston Financial Corporation, 7.375%, 12/1/2009 .. 3,800,000 3,684,480
Ford Motor Credit Corp., 7.375%, 10/28/2009 ........... 10,000,000 9,767,000
GS Escrow Corp., 7%, 8/1/2003 ......................... 7,000,000 6,412,630
General Electric Capital Corp., 7%, 2/3/2003 .......... 7,350,000 7,285,688
General Motors Acceptance Corporation, 7.75%,
1/19/2010 ............................................ 6,700,000 6,633,402
Goldman Sachs Group, Inc., 7.8%, 1/28/2010 ............ 6,600,000 6,515,982
National Westminster Bank PLC, 7.375%, 10/1/2009 ...... 6,600,000 6,366,954
PNC Funding Corp., 7%, 9/1/2004 ....................... 4,300,000 4,188,200
Prudential Insurance Co., 6.375%, 7/23/2006 ........... 10,000,000 9,250,300
Salomon Inc., 7.3%, 5/15/2002 ......................... 6,950,000 6,917,057
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108,571,713
Media 11.6% -----------
AMFM Inc., 8%, 11/1/2008 .............................. 6,000,000 5,985,000
British Sky Broadcasting Group PLC, 6.875%, 2/23/2009 . 7,800,000 6,887,868
Cablevision Systems Corp., 7.875%, 2/15/2018 .......... 10,000,000 9,592,500
Charter Communication Holdings LLC, 8.25%, 4/1/2007 ... 7,000,000 6,440,000
Liberty Media Group, 8.25%, 2/1/2030 .................. 4,275,000 4,250,034
News America Holdings, Inc., 9.25%, 2/1/2013 .......... 10,000,000 10,836,400
Outdoor Systems, Inc., 8.875%, 6/15/2007 .............. 10,000,000 10,212,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
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Principal
Amount ($) Value ($)
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TCI-Communications, Inc., 8%, 8/1/2005 .............. 11,250,000 11,480,288
Time Warner Enterprises, 10.15%, 5/1/2012 ........... 7,000,000 8,116,430
Time Warner, Inc., 9.125%, 1/15/2013 ................ 4,500,000 4,894,920
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78,695,940
Service Industries 0.5% -----------
Allied Waste North America, 7.375%, 1/1/2004 ........ 3,500,000 3,150,000
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Durables 2.1%
Daimler-Benz NA Holdings, 7.375%, 9/15/2006 ......... 6,400,000 6,280,640
Lear Corp., 7.96%, 5/15/2005 ........................ 8,000,000 7,609,600
13,890,240
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Manufacturing 0.7%
Graham Packaging Co., 8.75%, 1/15/2008 .............. 5,150,000 4,770,188
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Technology 0.7%
Xerox Corp., 5.5%, 11/15/2003 ....................... 5,000,000 4,638,000
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Energy 4.5%
Barrett Resources Corp., 7.55%, 2/1/2007 ............ 6,700,000 6,227,649
Conoco Inc., 6.35%, 4/15/2009 ....................... 5,500,000 5,018,805
Lomak Petroleum, Inc., 8.75%, 1/15/2007 ............. 5,000,000 4,500,000
Pioneer Natural Resources Co., 6.5%, 1/15/2008 ...... 6,900,000 5,783,442
Texas Eastern Transmission Corp., 10%, 8/15/2001 .... 5,500,000 5,689,420
Williams Gas Pipeline Center, 7.375%, 11/15/2006 .... 3,275,000 3,190,374
-----------
30,409,690
-----------
Construction 0.5%
Nortek Inc., 9.125%, 9/1/2007 ....................... 3,250,000 3,071,250
Transportation 3.2%
Allied Holdings Inc., 8.625%, 10/1/2007 ............. 4,000,000 3,540,000
Continental Airlines Inc., Class B, Series 1999,
6.795%, 2/2/20206 .................................. 8,000,000 7,261,600
Delta Air Lines, Inc., 7.9%, 12/15/2009 ............. 1,950,000 1,874,691
Delta Air Lines, Inc., 8.3%, 12/15/2029 ............. 4,500,000 4,315,500
Newport News Shipbuilding Co., 8.625%, 12/1/2006 .... 5,000,000 4,825,000
-----------
21,816,791
-----------
Utilities 5.2%
Cleveland Electric Illumination Co., Series B, 7.67%,
7/1/2004 ........................................... 6,600,000 6,436,782
Detroit Edison Co., 7.5%, 2/1/2005 .................. 6,600,000 6,573,006
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Houston Light & Power Capital Trust II, Series B, 8.257%,
2/1/2037 ............................................... 6,500,000 5,931,250
Niagara Mohawk Power Corp., 6.625%, 7/1/2005 ............ 7,250,000 6,855,673
Public Service Co. of Colorado, 6%, 4/15/2003 ........... 10,000,000 9,566,200
35,362,911
- --------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $413,029,680) 395,026,328
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Other 2.1%
- --------------------------------------------------------------------------------------
Riverside Loan Trust I, 7.438%, 7/16/2008
(Cost $15,000,000) ..................................... 15,000,000 14,201,340
- --------------------------------------------------------------------------------------
Total Investment Portfolio-- 100.0% (Cost $719,027,821) (a) 678,727,310
- --------------------------------------------------------------------------------------
</TABLE>
* Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities.
(a) The cost for federal income tax purposes was $720,536,756. At January 31,
2000, net unrealized depreciation for all securities based on tax cost was
$41,809,446. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost of
$1,203,644 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value of $43,013,090.
Included in the portfolio are investments in mortgage or asset-backed
securities which are interests in separate pools of mortgages or assets.
Effective maturities of these investments may be shorter than stated
maturities due to prepayments. Some separate investments in the Federal
National Mortgage Association and the Government National Mortgage
Association issues which have similar coupon rates have been aggregated for
presentation purposes in the investment portfolio.
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
Financial Statements
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities as of January 31, 2000
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Investments in securities, at value (cost $719,027,821) . $ 678,727,310
Cash .................................................... 14,523,657
Recievable for investment sold .......................... 25,186,265
Interest receivable ..................................... 11,997,631
Receivable for Fund shares sold ......................... 459,953
Other assets ............................................ 172
-------------
Total assets ............................................ 730,894,988
Liabilities
- --------------------------------------------------------------------------------
Payable for investments purchased ....................... 39,250,267
Payable for Fund shares redeemed ........................ 1,664,598
Accrued management fee .................................. 561,433
Other accrued expenses and payables ..................... 1,563,398
-------------
Total liabilities ....................................... 43,039,696
Net assets, at value .................................... $ 687,855,292
Net Assets
- --------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ..................... 4,507,458
Net unrealized appreciation (depreciation) on investments (40,300,511)
Accumulated net realized gain (loss) .................... (22,338,352)
Paid-in capital ......................................... 745,986,697
Net assets, at value .................................... $ 687,855,292
Net Asset Value
- --------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($687,855,292 / 56,322,200 outstanding shares of
beneficial interest, $.01 par value, unlimited number
of shares authorized) .................................. $ 12.21
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations for the year ended January 31, 2000
- --------------------------------------------------------------------------------
Investment Income
- --------------------------------------------------------------------------------
Interest ...................................................... $ 53,846,326
------------
Total income .................................................. 53,846,326
------------
Expenses:
Management fee ................................................ 4,519,304
Services to shareholders ...................................... 5,840,776
Custodian and accounting fees ................................. 129,635
Trustees' fees and expenses ................................... 40,678
Reports to shareholders ....................................... 177,629
Auditing ...................................................... 52,651
Legal ......................................................... 18,860
Registration fees ............................................. 44,817
Other ......................................................... 25,728
------------
Total expenses before reductions .............................. 10,850,078
Expense reductions ............................................ (3,684,637)
------------
Total expenses after expense reductions ....................... 7,165,441
- --------------------------------------------------------------------------------
Net investment income 46,680,885
- --------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- --------------------------------------------------------------------------------
Net realized gain (loss) from investment transactions ......... (19,415,171)
Net unrealized appreciation (depreciation) during the period on
investments .................................................. (47,271,570)
- --------------------------------------------------------------------------------
Net gain (loss) on investments (66,686,741)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $(20,005,856)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------------
One Month
Year Ended Ended Year Ended
Increase (Decrease) in Net January 31, January 31, December 31,
Assets 2000 1999 1998
- -------------------------------------------------------------------------------------
Operations:
<S> <C> <C> <C>
Net investment income ........... $ 46,680,885 $ 4,044,321 $ 45,678,014
Net realized gain (loss) from
investment transactions ........ (19,415,171) (1,400,330) 14,304,429
Net unrealized appreciation
(depreciation) on investment
transactions during the period . (47,271,570) 4,596,618 (15,559,064)
------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations ..................... (20,005,856) 7,240,609 44,423,379
------------- ------------- -------------
Distributions to shareholders:
From net investment income ...... (47,341,068) -- (44,503,457)
------------- ------------- -------------
From net realized gains ......... -- -- (14,183,125)
------------- ------------- -------------
Fund share transactions:
Proceeds from shares sold ....... 215,739,482 33,147,329 334,489,016
Reinvestment of distributions ... 42,701,249 1,359 53,731,519
Cost of shares redeemed ......... (288,967,370) (60,589,752) (263,283,739)
------------- ------------- -------------
Net increase (decrease) in net
assets from Fund share
transactions ................... (30,526,639) (27,441,064) 124,936,796
------------- ------------- -------------
Increase (decrease) in net assets (97,873,563) (20,200,455) 110,673,593
Net assets at beginning of period 785,728,855 805,929,310 695,255,717
Net assets at end of period
(including undistributed net
investment income of $4,507,458,
$5,049,957, and $1,022,643, ------------- ------------- -------------
respectively) .................. $ 687,855,292 $ 785,728,855 $ 805,929,310
------------- ------------- -------------
Other Information
- -------------------------------------------------------------------------------------
Shares outstanding at beginning
of period ...................... 58,833,586 60,884,669 51,662,855
------------- ------------- -------------
Shares sold ..................... 16,928,791 2,505,854 24,661,783
Shares issued to shareholders in
reinvestment of distributions .. 3,397,003 107 4,016,366
Shares redeemed ................. (22,837,180) (4,557,044) (19,456,335)
------------- ------------- -------------
Net increase (decrease) in Fund
shares .......................... (2,511,386) (2,051,083) 9,221,814
Shares outstanding at end of ------------- ------------- -------------
period .......................... 56,322,200 58,833,586 60,884,669
------------- ------------- -------------
22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
- ------------------------------------------------------------------------------------
2000(b) 1999(c) 1998(d) 1997(d) 1996(d) 1995(d)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.36 $13.24 $13.46 $13.15 $13.61 $12.32
- ------------------------------------------------------------------------------------
Income from investment
operations:
- ------------------------------------------------------------------------------------
Net investment income (a) .79 .07 .81 .80 .80 .83
- ------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (1.13) .05 .00(e) .31 (.36) 1.41
- ------------------------------------------------------------------------------------
Total from investment
operations (.34) .12 .81 1.11 .44 2.24
- ------------------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------------------
Net investment income (.81) -- (.79) (.79) (.81) (.92)
- ------------------------------------------------------------------------------------
Net realized gains on
investment transactions -- -- (.24) (.01) (.09) (.03)
- ------------------------------------------------------------------------------------
Total distributions (.81) -- (1.03) (.80) (.90) (.95)
- ------------------------------------------------------------------------------------
Net asset value, end
of period $12.21 $13.36 $13.24 $13.46 $13.15 13.61
- ------------------------------------------------------------------------------------
Total Return (%) (2.61)(f) .91**(f) 6.11(f) 8.66 3.41 18.54
- ------------------------------------------------------------------------------------
Ratios to Average Net assets and Supplemental Data
- ------------------------------------------------------------------------------------
Net assets, end of
period ($ millions) 688 786 806 695 579 578
- ------------------------------------------------------------------------------------
Ratio of expenses
before expense
reductions (%) 1.44 1.50* 1.33 1.18 .98 .99
- ------------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) .95 .95* .99 1.18 .98 .99
- ------------------------------------------------------------------------------------
Ratio of net investment
income (%) 6.19 5.85* 5.98 6.00 6.01 6.35
- ------------------------------------------------------------------------------------
Portfolio turnover rate (%) 81 21** 126 62 67 128
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the year ended January 31, 2000.
(c) For the one month ended January 31, 1999. On August 10, 1998, the Trustees
of the Fund changed the fiscal year end from to January 31 from December
31.
(d) For the year ended December 31.
(e) Amount is less than one half of $.01.
(f) Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
23
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
A. Significant Accounting Policies
Scudder Income Fund (the "Fund") is a diversified series of Scudder Portfolio
Trust (the "Trust") which is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company
and is organized as a Massachusetts business trust.
On August 10, 1998, the Trustees of the Fund changed the fiscal year end from
December 31 to January 31.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio debt securities purchased with an original
maturity greater than sixty days are valued by pricing agents approved by the
officers of the Fund, whose quotations reflect broker/dealer-supplied valuations
and electronic data processing techniques. If the pricing agents are unable to
provide such quotations, the most recent bid quotation supplied by a bona fide
market maker shall be used. Money market instruments purchased with an original
maturity of sixty days or less are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Trustees.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian or
sub-custodian bank, receives delivery of the underlying securities, the amount
of which at the time of purchase and each subsequent business day is required to
be maintained at such a level that the market value is equal to at least the
principal amount of the repurchase price plus accrued interest.
When Issued/Delayed Delivery Securities. The Fund may purchase securities with
delivery or payment to occur at a later date beyond the normal settlement
period. At the time the Fund enters into a commitment to purchase a security,
the transaction is recorded and the value of the security is reflected in the
net asset value. The value of the security may vary with market fluctuations. No
interest accrues to the Fund until payment takes place. At the time the Fund
enters into this type of transaction it is required to segregate cash or other
liquid assets at least equal to the amount of the commitment.
24
<PAGE>
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
At January 31, 2000, the Fund had a net tax basis capital loss carryforward of
approximately $8,539,000 which may be applied against any realized net taxable
capital gains of each succeeding year until fully utilized or until January 31,
2007 ($2,659,000) and January 31, 2008 ($5,880,000), the respective expiration
dates, whichever occurs first.
In addition, from November 1, 1999 through January 31, 2000 the Fund incurred
approximately $12,266,000 of net capital realized losses. As permitted by tax
regulations, the Fund intends to elect to defer these losses and treat them as
arising in the fiscal year ending January 31, 2001.
Distribution of Income and Gains. Distributions of net investment income, if
any, are made quarterly. Net realized gains from investment transactions, in
excess of available capital loss carryforwards, would be taxable to the Fund if
not distributed, and, therefore, will be distributed to shareholders at least
annually.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. As a result, net
investment income (loss) and net realized gain (loss) on investment transactions
for a reporting period may differ significantly from distributions during such
period. Accordingly, the Fund may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of the
Fund.
Investment Transactions and Investment Income. Investment transactions are
accounted for on the trade date. Interest income is recorded on the accrual
basis. Original issue discounts are accreted for both tax and financial
reporting purposes. Realized gains and losses from investment transactions are
recorded on an identified cost basis.
B. Purchases and Sales of Securities
During the year ended January 31, 2000, purchases and sales of investment
securities (excluding short-term investments and direct U.S. Government
Obligations) aggregated $286,197,422 and $316,110,405, respectively.
25
<PAGE>
Purchases and sales of direct U.S. Government obligations aggregated
$296,971,456 and $300,956,146, respectively.
C. Related Parties
Under the Investment Management Agreement (the "Agreement") with Scudder Kemper
Investments, Inc. (the "Adviser"), the Adviser directs the investments of the
Fund in accordance with its investment objectives, policies, and restrictions.
The Adviser determines the securities, instruments, and other contracts relating
to investments to be purchased, sold or entered into by the Fund. In addition to
portfolio management services, the Adviser provides certain administrative
services in accordance with the Agreement. The management fee payable under the
Agreement is equal to an annual rate of 0.65% on the first $200,000,000 of
average daily net assets, 0.60% on the next $300,000,000 of such net assets, and
0.55% of such net assets in excess of $500,000,000, computed and accrued daily
and payable monthly. Effective March 2, 1998, the Adviser has agreed to maintain
the annualized expenses of the Fund at not more than 0.95% of average daily net
assets until April 30, 2000. Accordingly, for the year ended January 31, 2000,
the Adviser did not impose a portion of its management fee aggregating
$3,641,318 and the amount imposed aggregated $877,986, which was equivalent to
an annualized effective rate of 0.12% of the Fund's average daily net assets. In
addition, during the year ended January 31, 2000, the Adviser reimbursed the
Fund $1,085,037 for losses incurred in connection with portfolio securities
trading.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended January 31, 2000, the amount charged to the Fund by SSC aggregated
$778,602, of which $189,257 is unpaid at January 31, 2000.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans invested in the Fund. For the year ended January 31,
2000, the amount charged to the Fund by STC aggregated $3,448,200, of which
$842,203 is unpaid at January 31, 2000.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
January 31, 2000, the amount charged to the Fund by SFAC aggregated $93,994, of
which $8,030 is unpaid at January 31, 2000.
26
<PAGE>
The Fund is one of several Scudder Funds (the "Underlying Funds") in which the
Scudder Pathway Series Portfolios (the "Portfolios") invest. In accordance with
the Special Servicing Agreement entered into by the Adviser, the Portfolios, the
Underlying Funds, SSC, SFAC, STC, and Scudder Investor Services, Inc., expenses
from the operation of the Portfolios are borne by the Underlying Funds based on
each Underlying Fund's proportionate share of assets owned by the Portfolios. No
Underlying Fund will be charged expenses that exceed the estimated savings to
such Underlying Fund. These estimated savings result from the elimination of
separate shareholder accounts which either currently are or have potential to be
invested in the Underlying Funds. For the year ended January 31, 2000 the
Special Servicing Agreement expense charged to the Fund amounted to $1,118,801.
The Fund pays each Trustee not affiliated with the Adviser an annual retainer
plus specified amounts for attended board and committee meetings. For the year
ended January 31, 2000, Trustees' fees and expenses aggregated $40,678.
D. Expense Off-Set Arrangements
The Fund has entered into arrangements with its custodian and transfer agent
whereby credits realized as a result of uninvested cash balances were used to
reduce a portion of the Fund's expenses. During the year ended January 31, 2000,
the Fund's custodian and transfer agent fees were reduced by $23,639 and
$19,680, respectively, under these arrangements.
E. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $1 billion
revolving credit facility for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated pro rata based on net assets among each of the Participants.
Interest is calculated based on the market rates at the time of the borrowing.
The Fund may borrow up to a maximum of 33 percent of its net assets under the
agreement.
27
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Trustees of Scudder Portfolio Trust and the Shareholders of Scudder
Income Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Scudder Income Fund (the "Fund") at
January 31, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at January 31, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
March 17, 2000
28
<PAGE>
Tax Information
- --------------------------------------------------------------------------------
January 31, 2000
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your account, please call 1-800-SCUDDER.
29
<PAGE>
Officers and Trustees
- --------------------------------------------------------------------------------
Lynn S. Birdsong* Kelly D. Babson*
o President and Trustee o Vice President
Henry P. Becton, Jr. Robert S. Cessine*
o Trustee; President and General o Vice President
Manager, WGBH Educational
Foundation Gary A. Langbaum*
o Vice President
Dawn-Marie Driscoll
o Trustee; President, Driscoll Ann M. McCreary*
Associates; Executive Fellow, o Vice President
Center for Business
Ethics, Bentley Robert C. Peck*
College o Vice President
Peter B. Freeman John Millette*
o Trustee; Corporate Director and o Vice President and Secretary
Trustee
John R. Hebble*
George M. Lovejoy, Jr. o Treasurer
o Trustee; President and Director,
Fifty Associates Caroline Pearson*
o Assistant Secretary
Wesley W. Marple, Jr.
o Trustee; Professor of Business *Scudder Kemper Investments, Inc.
Administration, Northeastern
University, College of Business
Administration
Kathryn L. Quirk*
o Trustee; Vice President and
Assistant Secretary
Jean C. Tempel
o Trustee; Venture Partner,
Internet Capital Group
30
<PAGE>
Investment Products and Services
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
<S> <C>
Money Market U.S. Growth and Income
Scudder U.S. Treasury Money Fund Scudder Balanced Fund
Scudder Cash Investment Trust Scudder Dividend & Growth Fund
Scudder Money Market Series -- Scudder Growth and Income Fund
Prime Reserve Shares* Scudder Select 500 Fund
Premium Shares* Scudder S&P 500 Index Fund
Managed Shares* Scudder Real Estate Investment Fund
Scudder Government Money Market
Series -- Managed Shares* U.S. Growth
Value
Tax Free Money Market+ Scudder Large Company Value Fund
Scudder Tax Free Money Fund Scudder Value Fund***
Scudder Tax Free Money Market Scudder Small Company Value Fund
Series -- Managed Shares* Scudder Micro Cap Fund
Scudder California Tax Free Money Fund** Growth
Scudder New York Tax Free Money Fund** Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Tax Free+ Scudder Select 1000 Growth Fund
Scudder Limited Term Tax Free Fund Scudder Development Fund
Scudder Medium Term Tax Free Fund Scudder 21st Century Growth Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund Global Equity
Scudder California Tax Free Fund** Worldwide
Scudder Massachusetts Limited Term Scudder Global Fund
Tax Free Fund** Scudder International Value Fund
Scudder Massachusetts Tax Free Fund** Scudder International Growth and
Scudder New York Tax Free Fund** Income Fund
Scudder Ohio Tax Free Fund** Scudder International Fund++
Scudder International Growth Fund
U.S. Income Scudder Global Discovery Fund***
Scudder Short Term Bond Fund Scudder Emerging Markets Growth Fund
Scudder GNMA Fund Scudder Gold Fund
Scudder Income Fund Regional
Scudder Corporate Bond Fund Scudder Greater Europe Growth Fund
Scudder High Yield Bond Fund Scudder Pacific Opportunities Fund
Scudder Latin America Fund
Global Income The Japan Fund, Inc.
Scudder Global Bond Fund
Scudder International Bond Fund Industry Sector Funds
Scudder Emerging Markets Income Fund Choice Series
Scudder Financial Services Fund
Asset Allocation Scudder Heath Care Fund
Scudder Pathway Conservative Portfolio Scudder Technology Fund
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio Preferred Series
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
</TABLE>
31
<PAGE>
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
- --------------------------------------------------------------------------------
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**+++ +++
Scudder Horizon Advantage**+++ +++ +++
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Closed-End Funds#
- -----------------------------------------------------------------------------------------
<S> <C>
The Argentina Fund, Inc. Montgomery Street Income Securities, Inc.
The Brazil Fund, Inc. Scudder Global High Income Fund, Inc.
The Korea Fund, Inc. Scudder New Asia Fund, Inc.
</TABLE>
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
+++ Funds within categories are listed in order from expected least
risk to most risk. Certain Scudder funds or classes thereof may
not be available for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to
federal, state, and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family
of Funds.
++ Only the International Shares of the fund are part of the Scudder
Family of Funds.
+++ +++ A no-load variable annuity contract provided by Charter National
Life Insurance Company and its affiliate, offered by Scudder's
insurance agencies, 1-800-225-2470.
+++ +++ +++ A no-load variable annuity contract issued by Glenbrook Life and
Annuity Company and underwritten by Allstate Financial Services,
Inc., sold by Scudder's insurance agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are
traded on the New York Stock Exchange and, in some cases, on
various other stock exchanges.
32
<PAGE>
Scudder Solutions
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Convenient Automatic Investment Plan
ways to invest,
quickly and A convenient investment program in which money is
reliably electronically debited from your bank account monthly to
regularly purchase fund shares and "dollar cost average" --
buy more shares when the fund's price is lower and fewer
when it's higher, which can reduce your average purchase
price over time.*
Automatic Dividend Transfer
The most timely, reliable, and convenient way to purchase
shares -- use distributions from one Scudder fund to
purchase shares in another, automatically (accounts with
identical registrations or the same social security or tax
identification number).
QuickBuy
Lets you purchase Scudder fund shares electronically,
avoiding potential mailing delays; money for each of your
transactions is electronically debited from a previously
designated bank account.
Payroll Deduction and Direct Deposit
Have all or part of your paycheck -- even government checks
-- invested in up to four Scudder funds at one time.
* Dollar cost averaging involves continuous investment in
securities regardless of price fluctuations and does not
assure a profit or protect against loss in declining
markets. Investors should consider their ability to
continue such a plan through periods of low price
levels.
Around-the- Scudder Automated Information Line: SAIL(TM) --
clock electronic 1-800-343-2890
account
service and Personalized account information, the ability to exchange
information, or redeem shares, and information on other Scudder funds
including some and services via touchtone telephone.
transactions
Scudder's Web Site -- www.scudder.com
Personal Investment Organizer: Offering account information
and transactions, interactive worksheets, prospectuses and
applications for all Scudder funds, plus your current asset
allocation, whenever your need them. Scudder's site also
provides news about Scudder funds, retirement planning
information, and more.
33
<PAGE>
- --------------------------------------------------------------------------------
1-800-SCUDDER www.scudder.com
Retirees and Automatic Withdrawal Plan
those who depend
on investment You designate the bank account, determine the schedule (as
proceeds for frequently as once a month) and amount of the redemptions,
living expenses and Scudder does the rest.
can enjoy these
convenient, Distributions Direct
timely, and
reliable Automatically deposits your fund distributions into the
automated bank account you designate within three business days after
withdrawal each distribution is paid.
programs
QuickSell
Provides speedy access to your money by electronically
crediting your redemption proceeds to the bank account you
previously designated.
For more Call a Scudder representative at
information about 1-800-SCUDDER
these services
Or visit our Web site at
www.scudder.com
Please address The Scudder Funds
all written PO Box 2291
correspondence Boston, Massachusetts
to 02107-2291
34
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About the Fund's Adviser
Scudder Kemper Investments, Inc. is one of the largest and most experienced
investment management organizations worldwide, managing more than $290 billion
in assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded over 80
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Financial Services Group. As a result, Zurich's subsidiary, Zurich
Kemper Investments, Inc., with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in New York, Scudder Kemper
Investments offers a full range of investment counsel and asset management
capabilities, based on a combination of proprietary research and disciplined,
long-term investment strategies. With its global investment resources and
perspective, the firm seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Financial Services Group. The Zurich Financial Services Group is
an internationally recognized leader in financial services, including
property/casualty and life insurance, reinsurance, and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER INVESTMENTS (SM)
[SCUDDER LOGO]
PO Box 2291
Boston, MA 02107-2291
1-800-SCUDDER
www.scudder.com
A member of the [LOGO] Zurich Financial
Services Group